Puerto Rico's Debt Crisis

November 21, 2013

It will not be long until Congress and the White House start squabbling again about the budget in Washington, D.C. But before they create another artificial debt crisis, Barack Obama and his Republican opponents ought to pay some attention to a real one 1,500 miles to their southeast. Puerto Rico, an American territory, risks a Greek-style bust, says the Economist.

  • With $70 billion of debt outstanding, the equivalent of 70 percent of its gross domestic product, it is more indebted than any of America's 50 states.
  • No growth and heavy debt are a toxic combination.
  • In 2010 Puerto Rico's previous governor tried -- and failed -- to boost the economy with tax cuts.
  • The current governor, Alejandro Padilla, has raised taxes sharply and hopes for a balanced budget in 2016.

This is where Greece's experience warrants study. It suggests that austerity alone is no route to solvency in a chronically uncompetitive economy. Puerto Rico's priority should be structural reforms to boost growth, from breaking up monopolies to reducing red tape.

  • The island scores 41st in the World Bank's Doing Business index, whereas America is 4th.
  • Labor costs are too high, not least because the federal minimum wage -- which applies in Puerto Rico -- is almost as much as the average wage.
  • Politicians in Washington must help, not least by getting rid of crazy rules that force all cargo between the island and American ports to be carried on American ships.

The second lesson from Greece is that if debt does need to be restructured, it is best to do it sooner rather than later. Greece waited far too long. America's Congress is unlikely to provide official loans to pay off private bondholders, as the Europeans did for Greece. But America's policymakers could, and should, ensure that a Puerto Rican debt restructuring is orderly. The federal government could provide interim financing to assist the restructuring, much as the International Monetary Fund does elsewhere. Even the legal details of Greece's bond swap could be a model.

None of this would be easy even if policymakers in San Juan and Washington were bold and farsighted. But the former are hesitating and the latter are not even paying attention.

Source: "Puerto Rico: Greece in the Caribbean," The Economist, October 26, 2013.

 

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